Thursday, April 17, 2008

LIBOR, the TSLF and the TAF

(WSJ Market Beat) Despite the best efforts of the Federal Reserve, financial institutions still perceive that the bank across the street they’re accustomed to lending to (and borrowing from) has some kind of risks that have not been fully accounted for.

The spread between LIBOR and three-month Treasury bills, as pointed out by Mark Gongloff in today’s Ahead of the Tape column, remains much higher than the historical trend. Tony Crescenzi, chief bond market strategist at Miller Tabak, says the ongoing credit stress is, in part, why the Federal Reserve’s $100 billion term auction facility (TAF) has been fully subscribed (that is, received as many or more bids than what is offered).

“Part of the reason for the pressures on bank rates such as LIBOR relates to the dealer community, which has tapped the banking sector via repos and other securities lending, reducing the amount of capital banks can lend,” he wrote in a commentary.

That stands in contrast to the activity in the Fed’s Term Securities Lending Facility, a more limited fund designed to alleviate some of the funding issues broker/dealers have been having. This facility has attracted fewer bids than the amount the Fed has been willing to auction — another auction is scheduled for today at 2 p.m. The most recent auction was slated at $50 billion, but only $34 billion of bids were received.

Lou Crandall, credit analyst at Wrightston ICAP, says, however, that “the TSLF is a $200 billion program targeted at a handful of leveraged dealers — the TAF is $100 billion aimed at essentially the global banking system.”

But the reduced interest in one and strong interest in the other oddly has a similar meaning. With the TSLF, dealers would have to be willing to take on collateral from their customers to exchange at the Fed’s discount window for Treasurys — but that still implies a re-leveraging, which they are trying to avoid, Mr. Crandall says.

The TAF’s popularity signals that banks remain worried about credit issues among their brethren, and instead of tapping the interbank market, they’re using the Fed’s TAF to fund their own needs, he says. So with LIBOR rates elevated, they continue to find funding elsewhere.

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